manipulating precious metals without owning actual precious metals

From what I understand about the futures market, when a big firm sells off a ton of precious metal futures, they don't have to produce actual physical precious metals. What if the people that have the precious metals just never sell and hoard it, what happens then?

 

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They do have to produce the shiny bars should the buyer choose to take delivery.

 

Which has been tried before.

 

Consider if JP Morgan sold 10,000 contract oz of gold a couple of days ago, they have to deliver if any one bought the contracts, and lets say the buying party wanted delivery, so they paid the full price. its destiny would transfer to the buyer on a certain date. But then today, gold is down to about 1566 from the 1630 avg a couple of days ago. So JP Morgan can either buy or replace with calls or delivery contracts and basically books about $70 x 10,000 or $700,000 for their foresight. The loser is whoever took the other side , buying the contracts, maybe because someone told them that gold was going much higher. I do not know if JPM took such action or not as they may think that gold may go much lower.

If the market for gold had gone the other way, JPM would lose. If stayed the same, probably they would both close off and only lose exchange fees. There is a set calendar for delivery of futures, and even at the worse, the one delivering has 30 days notice to put up or buy the contract back or deliver the gold.

 

Suppose it was a buyer that actually wanted the physical 10,000 oz of gold and it doesn't matter to them if gold momentarily lost ~$50/oz. Then JP Morgan has a problem if they didn't actually possess the gold. They would either be forced to to quickly try and buy it on the spot market or more likely, from another depositor at one of the bullion vaults with a very significant premium added on.

As long as they keep gold prices forced down, they open themselves up to this risk. The bigger issue at hand is that if China is moving ~60 - 100 tons of gold into the country, where is this volume of gold coming from?

 

But always remember these markets are not truly made for those wishing to exchange physical metals. In fact, the market has the right to bar those who they feel abuse the ability to take physical delivery. The point of the market is for users and manufacturers to hedge their positions WITHOUT having to trade physical metals. In fact, a major component of all commodity calculations is basis, which is the price difference between the CME and local physical delivery.

Its assumed no one physically wants the commodity. Do you really believe any of the corn traded on the CME physically gets delivered? maybe 1% at most, and that most likely was the result of an error.

 

I don't think that JP Morgan would sell short (naked) , but if they did, they do have a time limit ( SEC regs) to deliver or offset, ( usually 30 days for most commodities), other alternatives so they would not have to buy at spot, depends on whether they feel it will still go down or at a specific period ( maybe 60 days) it will be higher. If they thought it at a bottom for a while, they would themselves buy a contract for delivery in the same period as the one sold. The difference is that the price would be the ~ $50 less oz., so they would only make about $50 x 10,000 and be off the hook for the their delivery of gold as they bought a delivery of gold in the same expiration period which offset.So they would keep their physical.

If they thought it was still going down, They would let their sell stand for a time, or hedge with some call options that could be converted to delivery later and if gold comes back up, the call value increase will offset some of the physical cost. The fact is they made money , the hedge protects it. Of course this is hypothetical to help answer the OP.

 

Maybe. I'm thinking that if they didn't have the 10,000 oz, and was forced to deliver the actual gold, then the price would be high enough in costs where they would lose money. Or, they might try to offer up cash to the buyer, at a significant premium, to stand down.

 

I'm willing to bet that 100% of the corn contracts are delivered. Unlike gold, corn has a shelf life where the value goes to $0 if too much time passes.

 

Nobody physically wants the commodity? Are you saying that all the companies in the world that buy futures on corn because they use it in their business never take delivery? Where does all that corn go, does it just rot or do they fill landfills with it?

Just remember this, it's written that the seller can settle for cash if the commodity is not available, it's written in their rules to cover their butts.

 

As Fatima said, the seller of the futures would have to buy the metal on the open market, and could feasibly end up taking a loss as they'd have to actually pay the going rate of the real asset. This is why they will often pay out more cash than the contract is worth when people ask for delivery, because it's still cheaper than buying the physical metal for its fair value. That suffices that while these markets are providing a service and a safety net for producers, it is also impacting their profitability by diluting the supply and usurping demand from the real market, both of which put downward pressure on the price of the real commodity.

 

The annual US corn yield is approx 13 billion bushels. A CME corn contract is 5000 bushels. At 3:00 PM this afternoon go to the CME website and check the futures volume for July delivery corn. You might want to re-think your above statement.

As for the JP Morgan forced delivery scenario suggested above. Why would they even cover a significant contract utilizing a naked short with a party where there was even a remote possibility of forced delivery?

 

You are confusing volume of futures traded with actual futures contracts. Eventually each of those contracts for 5000 bushels gets delivered. This is unlike gold where the objective of the large players is to never physically deliver the stuff.

 

I don't think you're correct. I'm sure there are bunches of speculators that have no intention what so ever of taking delivery of 1 grain of agriculture use corn. You should come to grips with the reality of commodities being a giant casino where speculators make bets on a constant basis. Some win and some lose, but not one of the speculators wants to actully own a silo of grain.

 

I am saying the markets are a hedging mechanism, not a place where the good physcially change hands. Talk to all of the traders, CME officials, and the like, and all of them talk about hedging and basis, basis being the price difference between buying the commodity locally versus the CME price. The market is for financial hedging, NOT to go buy the commodity.

 

1000% factually incorrect. The vast majority of ALL commodity contracts are never delivered, and are simply offset. A farmer "sells" his corn on the CME. When his crop comes in he physically sells it to the local elavator and then buys the offseting position on the CME. This gain or loss effectively locked in his price when combined with the proceeds from the local elavator. Only basis change will mathematically make this not a true statement.

Btw open interest is the number you need to look at, not number of futures since open interest is the true quantity of contracts created.

I am sure you will argue with me Fatima, as usual. However, I am in agriculture, and just spent 2 days AT the CME talking to traders, CME officials, etc. Everyone else here should take that into account if they wish to believe you over me or others with real experience in these markets.

Edit: Btw, I am not trying to be snarky or condescending. I am, though, saying I asked these questions specifically to get these answers just a few days ago to people who do this every day. I am not saying I am smart, just have pointed, recent experience. I was physically able to ask CME officials these questions, something which most coin collectors do not have the chance to do.

 

While your next post points that out, I'm still going to call BS that none of those contracts ever get delivered.

Just because the CME told you something doesn't make it 100% true, 100% of the time. Can you honestly say that you believe 100% of what they tell you? I don't think anybody I've ever met is that naive.

 

A few may get delivered, but the vast majority do not. I never said none, just the vast majority.

Well, we can disagree on the second point sir. I will believe a VP of the CME, and the VP of one of the major trading firms over anyone else's opinion on how the CME operates. Even Jim, whom I have the utmost respect for, I would not believe over an officer of the CME on how the CME operates.

I guess the closest analogy I can think of is I will trust a butcher on which cut of meat comes from what part of the animal over someone who simply watches the Food Network. The Food Network viewer may have an opinion, he may have heard second or third hand some information, but the butcher does this every day, hands on, so I trust him to be better versed in the subject.

 

What if that butcher tells you a round steak is the finest cut? Do you still believe him? My point is you may trust your source, I don't.

 

Yes but if 100%/all corn contracts are delivered then the entire volume can only be open interest? Is that not correct?